Advertisement

Floating rate note

A floating rate note is a form of security that carries a variable interest rate which is adjusted regularly by a margin against a benchmark rate such as LIBOR.

A floating rate note (FRN) is a form of security, invented in the euromarkets and adopted elsewhere, that carries a variable interest rate which is adjusted regularly (at one to six-monthly intervals - whatever is preferred by the issuer) by a margin against a benchmark rate such as LIBOR (the London Inter-Bank Offered Rate of Interest).

Advertisement - Article continues below

Issued for three years or longer, FRNs are popular during periods of increased volatility in interest rates, when lenders may be reluctant to lend funds cheaply at a fixed period for a fixed rate.

For example, the issuer might agree that their FRN will pay 50 basis points (0.5%) over the rate of LIBOR. So if LIBOR was 6% over a six-month period (it is usually worked out as an average), the FRN would pay 6% plus the 0.5% spread, or 6.5% in total over the next six months.

A straight, or 'vanilla', eurobond would carry a fixed rate of interest regardless of LIBOR. One variation is an inverse FRN. Interest payments on these rise as interest rates fall, and vice versa.

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020
Visit/glossary/600702/emerging-markets
Glossary

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

Visit/investments/commodities/industrial-metals/601401/money-printing-infrastructure-base-metals-copper
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020
Visit/economy/eu-economy/601422/heres-why-investors-should-care-about-the-eus-plan-to-tackle-covid-19
EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Visit/investments/funds/601385/in-support-of-active-fund-management
Funds

In support of active fund management

We’re fans of passive investing here at MoneyWeek. But active fund management has its place too, says Merryn Somerset Webb.
25 May 2020